HomeKnow-HowEmerging Trends: Europe's next big tech opportunities

Emerging Trends: Europe’s next big tech opportunities

In 2021, the European tech ecosystem was in rude health – smashing the $100 billion VC funding mark for the first time. Two years later, however, that number had halved with the annual State of European Tech report placing annual funding for 2023 at $45 million.

The wider economic context can’t be ignored. 2023 again saw a difficult macro environment. It’s important, however, to not let a broad, region-wide perspective gloss over market-by-market performance and characteristics. The UK, for example, had a strong year, with HSBC finding that VC funding reached $22 billion, surpassing pre-pandemic levels, following an H2 2023 funding acceleration. 

While tech ecosystems in other European nations didn’t fare as well in comparison – we shouldn’t get carried away and extrapolate too much from total funding numbers. The UK boasts more scale-up tech companies in comparison to other European nations. That’s a good thing, of course, but we can also expect more talent to leave these now mature companies in search of a new early-stage adventure. 

Indeed, when looking across the continent, the same State of European Tech report also found that Europe is still vastly outpacing the US when it comes to the number of tech founders hitting the market, despite the bar to entry now being far higher. This bodes well for the months ahead, where we’re seeing key trends and opportunities shaping Europe’s tech ecosystem for the better. So, let’s dig in deeper.

Paris set to capitalise on strong groundwork

In years gone by, France was associated with bureaucracy – the kind of business climate that’s off-putting for entrepreneurs. It would be wrong to tar France with the same brush today. Smart government support for start-ups has resulted in resilient early-stage funding. The Bpifrance public investment bank has pumped tens of billions into French start-ups to serve as a resilient source of early-stage funding. This is a key reason why France saw less of a decline in VC funding in 2023 than other major European tech hubs.

Funding is just one piece of the puzzle though. France’s success can also be credited to the government’s broader measures to foster an environment for start-ups. This includes the Tibi programme, designed to shepherd more institutional money into late-stage funds, innovation tax credits, technology excellence centres financed  by public-private partnerships and innovation clusters to connect innovators within the same region 

In the coming months, expect to see stronger competition at the pre-seed and seed level for funding in France. Several recent raises have left regional funds with dry powder to deploy combined with higher-than-average super angel investor presence. The billionaire  Xavier Niel plans to invest 200 million euros into AI to push France to the forefront of the field, joining growing interest from large Family Offices, pan-European investors and French venture firms in supporting the thriving ecosystem.

In terms of the technology sweet spot for the French ecosystem, AI is the stand-out. Local players including Mistal AI, poolside and Raive are building foundational models in addition to activity in the AI tooling and application spaces. The presence of local Google and Meta AI research labs further strengthens the French case for being the leading European hub for AI. Fintech and climate tech are also fixtures of the French tech ecosystem. Mistral is particularly exciting and worth mentioning. Here’s an early-stage company that capitalised on its EU roots and managed to strike a partnership agreement with Microsoft despite Microsoft’s very public association with OpenAI. An achievement of this scale is pretty mind-blowing. 

Overall, France has done a great job in its efforts to offer incentives for start-ups of the kind that have been hugely successful in the U.S. but haven’t been well replicated in Europe historically. That puts the local ecosystem on a great footing for the future.

Germany is a frontrunner in future-shaping technology

Germany was the world’s worst-performing major economy in 2023. Yet, despite this backdrop, there’s reason to feel optimistic about the outlook for Germany’s tech sector this year. While France is making waves in AI, mega funding rounds for German AI players like Aleph Alpha, DeepL and Helsing in 2023 highlighted how the country boasts a serious ecosystem for frontier technology shaping AI’s future.

The German government has made clear its ambitions to invest more in homegrown and European VCs. Through its Future Fund and state-backed KfW Capital, the German state is investing and committing billions to start-ups and VC funds that align with its strategic vision. As a result of this targeted direction of funding, we expect to see Germany become one of the frontrunner ecosystems for renewable materials and more advanced areas of green technology in the years ahead.

The reality is, however, that any start-ups looking to benefit from large 2024 funding raises in Germany will have to demonstrate a commitment to the country’s domestic technology and public sector. This is down to the German state’s particularly active and influential sway role over regional VC funding. While there are positive signs of more institutional money in Germany being earmarked for growth capital, it still lags behind its contemporaries in funding per capita. Figures from the German start-up association, for example, reveal that while France invested a total of €107 per capita in start-ups in 2023, Germany only invested €85 per capita. 

As German society hunkers down for a tricky economic period, the tech start-ups aligned to the public sector’s vision for Germany’s long-term tech leadership are set to benefit from raises.

Arbitrage opportunities present AI talent boon for EU tech

Certain players in the tech ecosystems of France and Germany are undoubtedly making waves in the AI space today. But it would be remiss to overlook where this all started – the U.S.

OpenAI’s release of ChatGPT in November 2022 was a turning point. Quickly, enterprises and consumers came to see the transformative potential of generative AI and the technology has dominated the discourse since. According to PwC’s latest annual CEO survey, 32% of CEOs have already adopted generative AI across their company and 58% see generative AI as a catalyst for improving the quality of their products and services.

The rapid ascent of AI has had some obvious implications for the technology jobs market. The role of an AI engineer didn’t broadly exist two years ago. This meant a quick rush to convert knowledge workers from adjacent fields like Machine Learning into AI.

In the U.S., The ChatGPT shockwave resulted in a very significant outpacing of demand for AI talent compared to a relatively small talent pool. This has led to huge salary increases, with AI tech leads in the states today typically demanding salaries on or around the million-dollar mark. 

It’s been a different story in the EU. The aforementioned ChatGPT shockwave was more distributed over time, so related tech worker salaries on the continent did not experience a massive jump and are more reasonable compared to the U.S. even today. Additionally, tech companies in the EU have a strong backbone of engineers from eastern EU countries to tap into. Such talent can be converted over time to serve the needs of AI start-ups. This is eased even further by the simple visa requirements that the EU boasts. For these reasons, the EU’s tech ecosystems are well-positioned to compete against U.S. tech in the new field of AI.

In conclusion, clear patterns underline why Europe is currently outpacing the US when it comes to new tech founders. In French and German efforts, we see the critical role that government support plays in supporting start-ups of all stages through macroeconomic downturns. And despite Germany’s historically smaller base level of venture capital, the Government’s commitment to climate and deep tech is successfully developing a leading ecosystem for these technologies regionally. Looking to the horizon, AI is set to dominate and be where growth opportunities for technology companies lie in the coming years. Thanks to strong tech ecosystems and uniquely favourable job market conditions, European start-ups can emerge from the dash as future AI winners.

Alexander Pavlov
Alexander Pavlov
Alex Pavlov is a partner at RTP Global is a leading early-stage venture capital firm with a global footprint, dedicated to backing innovative founders who leverage technology to transform industries. He has a a particular focus on companies that are using technology to transform B2B software, Fintech, AI, Audio, Marketplaces, Fitness and entertainment sectors.

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